Revised double-tax pact with Korea notified

October 27, 2016 — INDOLINK Consulting (es)

Source: The Hindu Business Line, Oct 26, 2016

New Delhi: Cross border flow of technology and investments between India and South Korea is expected to get a further boost with the withholding tax rates on royalties or fees for technical services and interest income slashed from 15 per cent to 10 per cent.

The new dispensation is provided in the revised double taxation avoidance agreement (DTAA) between India and South Korea signed in May 2015 and had come into force from September 12 this year.Provisions of the new DTAA will have effect in India in respect of income derived in fiscal years beginning on or after April 1, 2017, an official release said.

Capital gains
Come April 1 next year, there will be a change in the way capital gains on shares get taxed under the newly revised DTAA.

According to the revised DTAA, capital gains arising on shares comprising more than 5 per cent of paid-up capital will get taxed in the jurisdiction (country) of source of income.Prior to this new regime, the country where the person making the gains was a resident had the taxing right.

The new DTAA also provides for a limitation of benefits clause and provides recourse to the taxpayers of both countries to apply for mutual agreement procedure (MAP) in transfer pricing disputes. Taxpayers will also be eligible to apply for bilateral advance pricing agreements.

To facilitate movement of goods through shipping between the two countries, the revised DTAA also provides for exclusive residence based taxation of shipping income from international traffic.

Experts’ take
Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said the revised DTAA with Korea is in line with recently concluded DTAA/ amendments with other jurisdictions.

“The significant one in Korea treaty is the shifting of residence based taxation of capital gains to source based taxation. This will imply that now India will have a right to tax capital gains earned by Korean company on sale of shares of Indian entity,” Singhania told BusinessLine.

However, one needs to wait for final print to know if existing investments will be grandfathered, he added.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said that the amendment related to capital gains is interesting and it may have a bearing on the renegotiation for the India-Netherlands and India-Singapore treaty which may come up next for renegotiation.

Another significant development, according to Singhania, is the reduction of tax rates on interest, royalty and fee for technical services.

Further, the revised DTAA also provides for change in taxation for shipping companies from source based to residence based taxation. “This will be beneficial for shipping companies and in line with international best practices,” he said.